Criminalising cartel conduct comes with risk

28 May 2018

Criminalising cartel conduct poses some risks to the way we do business in New Zealand. It may well have the unintended consequence of making us less competitive, both in New Zealand and in our export markets, and costing consumers more for goods and services.

Criminalising cartel conduct is being considered by Parliament. A cartel is formed when businesses agree to act together for an anti-competitive purpose, instead of competing against each other. Two competitors agreeing on the price they will charge for their products is an example of cartel conduct called price fixing. Other examples of cartel conduct are two competitors agreeing to divide up a market so they don’t compete against each other – e.g. agreeing that one will supply one part of a city exclusively, with the other exclusively supplying the other part of the city. Other examples include two competitors agreeing to restrict the supply of goods into a market to create high prices due their products being scarce, and where they also agree to bid rigging. The rationale behind examining the law is that price fixing harms competition, as cartel members make more profit than they would if they competed fairly, and this means that goods and services become more expensive for consumers to buy and consumers end up with fewer choices.

Cartel conduct is already an offence under the Commerce Act in New Zealand. You can get a considerable fine if you are found by a New Zealand Court to be price fixing. What is proposed is to make this a criminal offence that will allow sending offenders to jail. This happens in other countries, like the United States. The question is: Will criminalising cartel conduct promote better compliance with New Zealand’s Commerce Act? I don’t think so.

The first reason I think that is that as there have not been very many court cases taken in New Zealand for cartel conduct, therefore there isn’t a problem to fix. Tthere just doesn’t seem to be the need to criminalise cartel conduct. But the real reason comes down to the approach that can be taken. I think a proactive and educational approach, backed up by the current provisions of the Commerce Act, is the best way for New Zealand to go about achieving competitive conduct. Ultimately, what we want is healthy competition, noting that we are a small country and, because of that, there aren’t many competitors. We need to promote competitive conduct.

Then there is the unintended consequence. Because New Zealand is a small country most of our businesses are small to medium sized enterprises. This is particularly true with horticulture. To get products to market, whether in New Zealand or overseas, there are many regulatory hurdles. Our businesses need to work with each other on things like quality standards, food safety, biosecurity protecting our country from pest and diseases, setting and meeting overseas market access requirements and dealing with adverse weather events, to name just a few of the challenges. None of these activities are cartel conduct. None of these activities equate to price fixing. But criminalising cartel conduct makes it more risky to work together. If our businesses do not work together to solve the problems they face, supply of products will become more scarce and, prices will go up. This is exactly the reverse effect of what is intended. Consumers will be worse off.

New Zealand’s population size, plus the fact that our businesses are small to medium sized enterprises, means that the approach other countries take to deal with cartel conduct does not suit us in New Zealand. We need positive and proactive, light-handed regulation to keep the price of goods and services as cheap as possible, not criminal sanctions.